People invariably have questions when they hear about taxes on inheritances, and this is understandable. In this post we would like to look at transfer taxes and provide some useful background information.
Income Tax
In general, if you receive an inheritance you are not required to report the bequest as income on your income tax return. However, the situation becomes more complicated if you inherit appreciable assets. This is a matter that you should discuss with a tax lawyer or estate planning attorney.
Inheritance Tax
There is such a thing as an inheritance tax, but it is not levied on the federal level. There are a handful of states in the union that impose an inheritance tax on the state level.
Our firm practices in the state of New York. Fortunately, we do not have a state-level inheritance tax in New York. However, many people who live in New Jersey work and do business in the state of New York, and New Jersey does in fact have an inheritance tax.
An inheritance tax is levied on each individual who is receiving an inheritance, but there are typically exemptions. The rules vary state-by-state, but close relatives like parents, grandparents, spouses, and descendents are usually going to be exempt.
Estate Tax
There is indeed an estate tax on the federal level, and it carries a 40 percent maximum rate. The amount of the exclusion is $5.34 million. This means that only the portion of an estate that exceeds $5.34 million would be taxable.
If you were named as an inheritor who was receiving a percentage of an estate that was exposed to the estate tax, you would in essence be paying taxes on your inheritance. The amount that you received would be reduced because of the imposition of the federal estate tax.
However, the entire pie as it were would be taxed before the percentages were distributed. You would not be personally presented with an individual estate tax bill.
Here in the state of New York we also have a state-level estate tax. The amount of the exclusion is much lower at just $1 million. The New York state estate tax is a graduated tax that maxes out at 16 percent.
Tax Efficiency
Transfer taxes are a significant source of concern for high net worth families. If you are exposed to estate taxes you can take steps in advance to mitigate your exposure.
The wise course of action would be to discuss everything in detail with a licensed estate planning attorney. Your attorney will gain an understanding of your situation, listen as you explain your objectives, and apprise you of your options.
You can ultimately preserve your legacy as you devise a truly effective wealth preservation plan.
Mark S. Eghrari, Estate Planning Attorney
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